Performance security and/or retention moneys

The following information applies to all major
works contracts. However, an agency may choose to apply the same
principles to minor works contracts at its discretion.

For all major works contracts, the
Treasurer's Instruction 1228 requires an agency to ensure
that a contractor either:

provides security in relation to the contract; or,

at the agency's discretion, provides retention moneys either
instead of, or in addition to, security.

A decision on whether to allow retention
monies should be made during the agency's risk assessment of
the project.

Security

"Security" is something given as a
pledge that a person or entity will fulfil a promise or an
undertaking.

The basic principle in connection with
security is that it is held by the Principal (the Crown) for the
purpose of ensuring the due and proper performance of the
contract. It is released by the Principal to the contractor
at certain stages of the contract and if not released at a
designated stage then the Principal is in breach of contract.

The Principal can only draw upon security if
the contractor owes a debt to the Principal. Security is not
forfeited by the contractor simply because the contract is
cancelled or terminated at common law. The Principal can take only
sufficient of the security to meet the debt.

Form of Security

Security for Government major works contracts
shall be in the form of an unconditional bank guarantee given by an
approved financial institution or an unconditional performance bond
given by an approved insurance company.

Unconditional Performance
Bonds

Unconditional Performance Bonds (Demand Bonds)
are approved by the Tasmanian Government as an acceptable form of
security for Tasmanian Government works contracts. No other form of
Bond is acceptable.

An Unconditional Performance Bond will only be
acceptable where:

it is couched in terms that do not expose the Crown to any risk
that it might be terminated for any reason (eg non-payment of
premium) during their term;

it provides a direct recourse by the Crown to the underwriter in
the event of contractual default; and

it is subject to the laws of and legal action in Tasmania.

The Tasmanian Government retains the
discretion to approve or disapprove the form of an unconditional
undertaking and the financial institution or insurance company
giving it.

Treasury approved unconditional
performance bond providers

Unconditional Performance Bonds may be
accepted from the following companies whilst those companies
maintain Standard and Poor's claims-paying ability rating of
not less than A minus (A-), and agree to use the form of the Bond
as set out in Unconditional Performance Bond.

The approved Bond providers are:

Chartis Australia Insurance Limited;

Chubb Insurance Company of Australia Limited;

Swiss RE International SE; and

Vero Insurance Limited.

The costs of the transfer and re-transfer of
the security, and of any incidentals to the transfer and
re-transfer, (including all stamp duty or other taxes) will be
borne by the contractor.

Agency approved providers

Where an agency chooses to accept security
from a provider not approved by Treasury, the agency must ensure
the security meets the following:

the security is in the form of an unconditional and irrevocable
undertaking to pay on demand (refer to acceptable terms under Unconditional Performance Bond); and

the security provider operates in Australia; has a credit rating
threshold of A- or above as assessed by Standard and Poor's
or equivalent; and either is regulated by the Australian Prudential
Regulation Authority (APRA) or, if not regulated by APRA, limit the
total value of its performance bonds held by the agency to a
maximum value of 10 per cent of its net tangible assets.

When assessing a security provider's
suitability, agencies should also consider other factors to avoid
undue risks, such as the security provider's exposure across
all agencies and whether the contractor's risk exposure is
relative to the size of the security provider. Where an agency is
considering accepting security from a provider which is not
incorporated in Australia, it is crucial that the agency first seek
advice from the Crown Solicitor to identify the risks and determine
how these may be mitigated.

A list of security providers subject to APRA
regulation and further information on APRA in general is available
from the APRA website at www.apra.gov.au.

The costs of the transfer and re-transfer of
the security, and of any incidentals to the transfer and
re-transfer, (including all stamp duty or other taxes) will be
borne by the contractor.

Time for Lodgement of Security

Security must be lodged within 28 days of the
date of the acceptance of tender. Failure to lodge security
within 28 days is a substantial breach of contract within the
meaning of AS 2124-1992 Clause 44. In situations where a
contractor fails to lodge the required security within the period
allowed by the contract, the situation must be dealt with
immediately.

Call-up Security

If approval has been obtained to fully or
partially call up a bank guarantee, the financial institution is to
be directed by the agency to pay the Principal the agreed sum.

Retention monies

Retention moneys is a practice commonly used
in the building and construction industry where a percentage from
progress payments are withheld until the amount of retention held
equals the total amount of security required.

Where an agency elects to allow a contractor
to provide retention moneys either in full or in addition to
security, the agency is to deduct retention moneys from progress
payments at a rate of 10 per cent (10%) until the amount of
retention held, plus any security held, equals the required
security level.

When allowing retention moneys as an option,
agencies should consider the risks associated with the project and
whether a proportion of upfront security should be required (in
addition to retention) to mitigate those risks. Agencies should
also consider other factors to avoid undue risk, such as whether a
potential contractor has sufficient cash flow to allow retention
amounts to be deducted from progress payments without causing
adverse financial pressure.

Agencies are able to retain retention moneys
in their operating accounts for future payment in a later financial
year, subject to following the normal review and approval process
for carrying forward balances at the end of each financial year. If
an agency has any queries in relation to these requirements, they
should contact the Government Finance and Accounting Branch of
Treasury.

Amount of Security/Retention Moneys

The total amount of security and/or retention
moneys required under any particular contract shall be five per
cent (5%) of the contract sum up to a contract sum limit of
$500 000 plus three per cent (3%) of the amount by which the
contract sum exceeds $500 000.

However, the security amount may be managed
and adjusted to reflect the value of all outstanding works to be
provided by the contractor for that agency (where contracted to
complete a number of projects over similar/overlapping periods with
the agency).

Release of Security and Retention Moneys

The Principal must release any security and
retention moneys according to Clauses 5.7 and 5.8 of
AS 2124-1992.

To release part of a bank guarantee, the
relevant financial institution is to be directed by the agency to
release part of the security. Copies of this direction are to be
sent to the contractor and the superintendent.

This page has been developed by the Department of Treasury and Finance.